Personal Taxes and Corporate Cash Holdings
56 Pages Posted: 25 Mar 2020 Last revised: 22 Oct 2021
Date Written: February 28, 2020
Dividends are taxed at the personal level, but injecting funds into firms does not offer the symmetric tax benefit. Hence, there is a personal tax saving incentive to retain cash in the firm. We develop a corporate finance model of liquidity management, in which the firm’s liquidity policy trades off precaution and saved personal taxes against agency and corporate tax costs. The model implies that the tax saving motive is substantial and increasing with the dividend tax rate. Consistent with the model, we show empirically that, after the 2003 dividend tax cut, affected firms reduced their cash accumulation.
Keywords: Dividend Tax; Capital Gains Tax; Cash holdings; Agency Costs; Tax Savings Motive
JEL Classification: G32; G35; G38; H24; H32; K34
Suggested Citation: Suggested Citation